Glencore gets ready for the spotlight

Global mining investors will gather in Barcelona tomorrow to hear presentations from the chief executives of all five of the world’s top listed diversified mining companies at the annual Merrill Lynch Global Metals & Mining Conference.

There is bound to be plenty of interest in what BHP Billiton’s
Marius Kloppers
, Rio Tinto’s
Tom Albanese
, Vale’s Roger Agnelli, Xstrata’s Mick Davis and Anglo American’s Cynthia Carroll have to say about the state of the industry amid interest-rate tightening in China, concerns about slowing economic growth and a shortage of skilled labour.

But the real talk of the conference will be about the entry of a sixth peer to their exclusive club in light of Glencore’s plans for a $US10 billion ($9.3 billion) float in London and Hong Kong on May 19. Glencore will hold meetings with potential investors – including some from Australia – at the sidelines of the conference, but it will not give a formal presentation.

Chief executive
Ivan Glasenberg
, who is set to have a personal fortune of $US9.6 billion after the float, will attend the conference for one day.

Until now, Glencore has been a private partnership, most often described as a “secretive" Swiss commodities trader.

This accurately describes Glencore to the general public, but within the top end of the global mining industry, the organisation is very familiar. As one senior mining executive puts it, “Everyone knows Ivan."

The head of Glencore, who is South African-born but an Australian citizen, is said to be charming – but ruthless. He apparently does not suffer fools gladly.

Unfortunately, the head of a public company must sometimes do so, and there are concerns about how he’ll adapt to running an organisation that will be in the benchmark FTSE 100 index from the start and very much in the spotlight.

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Xstrata’s Davis, known for being terse, is one of the industry’s most admired executives, but Glasenberg has been described as even less willing to deal with “dumb" questions. Concerns have also been raised about Glencore’s corporate governance after the belated appointment of chairman Simon Murray, a 71-year-old businessman who made controversial remarks about the role of women in business.

That said, to date it appears the float is likely to be highly successful.

Glencore last week set a pricing range with a mid-point giving it a market value of $US61 billion, in line with pre-marketing research from some of the 23 brokers it has lined up for the offering. The final price won’t be set until May 19, but a good sign is the order book was covered by Friday despite a sudden plunge in global commodity prices on Thursday evening.

In line with Hong Kong market practice, cornerstone investors, including a sovereign wealth fund from Abu Dhabi, China’s Zijin Mining and funds such as BlackRock and Fidelity, had already subscribed for $US3.1 billion of stock that will be escrowed for six months before the offer is open to other investors.

Glencore differs from the top five diversified miners in that its business comprises three distinct arms: a traditional mining business; a trading business dealing in metals, oil and grain; and a 34.5 per cent stake in Xstrata, along with other listed assets.

Bernstein Research – one of the few brokers not linked to the float and therefore able to publish independently – estimates the listed assets, including the Xstrata stake, comprise 45 per cent of Glencore’s value, the trading business 35 per cent and its unlisted mining assets 20 per cent.

Valuing Glencore’s rather opaque trading business is proving far more difficult than placing valuations on its listed stakes or mining assets. Glencore argues the trading business gives it an advantage over other diversified mining groups in terms of market intelligence and access to assets in new areas, along with a hedge against commodity price volatility.

The trading business often outperforms relative to the mining business in times of falling commodities prices, as trading thrives on volatility rather than prices.

Perhaps for this reason, the most comparable listed trading business, Noble Group, trades on a higher multiple than the big mining companies. But companies such as Anglo that have big stakes in listed entities, as does Glencore, tend to trade at a discount.

And Glencore’s mining assets, while considered as good as those in Xstrata, are for the most part in far riskier countries. The trading business will also depend on Glencore keeping its stars, who will be able to cash out their shares after various lock-up ­periods expire.

Keeping all these points in mind, on UBS’s numbers, the mid-point of Glencore’s valuation range would see it start trading at a premium of all top five diversified miners based on enterprise value to earnings before interest, tax, depreciation and amortisation (EBITDA) and on a price-earnings multiple. However, it would still attract a lower valuation than Noble on both counts.

Over time, the expectation is Glencore’s direct interest in mining assets will increase at a rate that outpaces growth in its trading business.

Part of the rationale for going public is to give Glencore more firepower for acquisitions, and the expectation is it will use its premium trading multiple to buy miners trading at lower valuations. If so, it is eventually likely to dilute any premium, so investors may be cautious about buying in now at higher levels. For its part, Bernstein values the Glencore shares at £4.75 ($7.26), slightly below the published pricing range of £4.80 to £5.80.

The most oft-mooted deal for Glencore is a purchase of the remainder of Xstrata to form a $US100 billion global diversified miner that would better compete with the top three by market value: BHP, Vale and Rio. Then, the combined Glencore-Xstrata may even decide to add Anglo to the mix, giving it further bulk in key commodities.

To date, Xstrata has resisted Glencore’s advances, asking it to obtain a public valuation first. But once this is done, a deal does appear to make sense provided Xstrata shareholders receive an adequate price.

There may be concerns the trading arm – including oil and grain along with metals – is a poor fit with a miner, but on UBS’s numbers, trading would comprise only 11 per cent of the EBITDA of the combined group.

At a time when both Glencore and Xstrata are spending billions trying to grow their mining businesses, the combination would give it added firepower that investors in both companies could find attractive.jfreed@afr.com.au